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Tax relief for trading loss

Tax relief for trading loss

Contents

If your business spends more than it receives during an accounting period, it has made a trading loss. You can set off trading losses against profit or capital gains in any of the ways discussed below.

Early Trade Losses Relief

If you make a trading loss within any of the first 4 tax years of trading, you can carry it back and set it against your income from any source (but not capital gains) in the previous 3 tax years. You can?t pick and choose which years to set the loss against. You must start with the earliest year.

For example, you start a business in January 2010 (in the 10/11 tax year). If you make a loss in the 13/14 tax year, you can set this loss off against your income in the tax years 10/11, 11/12 and 12/13 in that order.

Claiming the loss

You must claim this relief within one year of the 31 January following the tax year of the loss. For a loss in 15/16, you must claim by 31 January 2018.

Carry-across and carry-back relief

HM Revenue & Customs also calls this relief ?Trade Loss Relief against general income?. You can carry the loss across and set it against your other income and capital gains in the year of the loss. This would reduce the income tax you?d otherwise have to pay on other income and/or the capital gains tax you?d otherwise have to pay on the capital gains.

You can also carry the loss backwards. This means the loss can be deducted from your total income and capital gains of the preceding tax year. This could give you a tax refund for the previous tax year. You need to set the loss against total income first and then set any excess loss against capital gains.

Claiming the loss

You must claim this relief within one year of the 31 January following the tax year of the loss. For a loss in 15/16, you must claim by 31 January 2018.

Carry-forward relief

If you suffer a trading loss, you can carry the loss forward. This means the loss will be deducted from profits that the business produces in future accounting periods.

This carry-forward relief may be less appealing to you as you have to wait for future profits of the business before you can benefit from loss relief. Also, this relief is more restrictive in that it only provides for the loss to be set against profits that the business produces - it doesn?t provide for relief against other sources of income or against capital gains.

Claiming the loss

You must claim by declaring your intention to use this loss relief within 4 years of the end of the tax year of the loss.

Carry-back of terminal trading loss

If you suffer a trading loss in the final 12 months in which you do business, you can carry this loss back. This means the loss will be deducted from your trading profit in the 3 tax years before the last year you were trading, taking the later years before the earlier years. You may then reclaim tax from the Inland Revenue that you?ve already paid. However, you can?t set the loss against capital gains or income from sources other than your trade.

Claiming the loss

You must claim this relief within 4 years of the end of the tax year of the loss.

Summary

The table below provides a summary of the trading loss relief that a sole trader is entitled to claim.

Type of reliefTime when loss occurredIncome/profits against which loss will be setRelevant tax year

Early Trade Losses relief

Within first 4 tax years of trading

Any income

3 tax years preceding loss, starting with earliest

Carry-across/back relief

Any accounting year of trading

Any income and chargeable gains

The tax year of the loss and the previous tax year

Carry-forward relief

Any accounting year of trading

Subsequent profits of the same trade

Any subsequent years until loss is absorbed

Terminal Carry-back relief

Final 12 months of trading

Profits of the same trade

The 3 tax years before the business ceased trading, starting with the latest